Microsoft: A Buy on Strengthening Numbers

Microsoft is quietly catching up with the other tech titans and belongs in your portfolio.

Microsoft(NASDAQ:MSFT) beat analyst expectations by a penny, turning in earnings per share of $0.76, but declined 3.7% in net income. The company finds itself in a uniquely bifurcated state of existence that is often overlooked by investors. The consumer side of its business -- the side that partnered with Nokia(NYSE:NOK) to bring us the Windows smartphone -- often gets the ink, but it is its stable enterprise business that often keeps the bills paid. While Microsoft has been cagey about sharing precise numbers regarding consumer sales, it continues to impress me. After an extended "quiet" period, in which very little hype came from the software giant, it seems to be gunning for the top spot again and belongs in your core portfolio.

Microsoft's hard numbersRevenue for the quarter came in at $21.46 billion, in line with the consensus at Zack's but below the average of $21.56 billion compiled by Bloomberg. This revenue figure, which is up 2.7% on a year-over-year basis and 34% sequentially, resulted in the $6.38 billion of net income mentioned above. A year ago, net income came in at $6.6 billion, meaning that despite higher revenues, profits dropped by 4% on a year-over-year basis.

Every division, except Entertainment & Devices -- which was down 11% year over year -- grew positively for the company. The Business Division was up 3.4% sequentially, but contracted 9.4% from a year ago. Servers & Tools was up 8.7% year over year, and Online Services grew by 10.8% on the same basis. Overall, Microsoft got a favorable mix from its diversified business lines.

While Windows 8 is a central theme for the quarter, IDC analyst Bob O'Donnell points out that "[o]ne of the biggest stories in 2013 is the business transition from Windows XP to Windows 7. There are a staggering number of machines still running Windows XP. The IT guys have to pull the plug on those and upgrade, and most will do that by buying new machines." This should be good news for Microsoft as it looks to maintain the stability that its enterprise business provides.

The importance of mobileIn the simplest terms, as mobile increases in importance, it is vital that Microsoft continue to push into the mobile arena. In a recent interview, Bloomberg's Cory Johnson summarizes this as Microsoft having a smartphone and a tablet that "doesn't suck" so that it can convince IT managers to purchase Windows 8. He acknowledges that while he is not awed by either the Nokia Lumia or the Microsoft Surface, both are solid and his preference for Apple's(NASDAQ:AAPL) iOS is largely one of familiarity.

However, where Microsoft is expected to take aim at the corporate space and attack Apple is with the Surface Pro. The tablet is slated to go on sale on Feb. 9 and is designed to be a fully productive tablet that also has the ability to function in the place of a laptop. The Surface Pro will be positioned to company CIOs as as having the distinct advantage of being able to easily integrate with existing systems, run the Microsoft Office suite of software, and be adopted with minimal pain to the IT department.

Flagging PC sales and blossoming iPad sales were critical drivers in Microsoft's attack on this important part of mobile computing. If it is able to attain even a fraction of the business dominance that Office enjoys with the Surface Pro, the device could well be the game changer that Microsoft needs to catapult itself back to the forefront of the technology space. The Surface Pro is particularly important because the Windows RT-driven Surface has met only mild success since its release.

The lukewarm reception to the initial Surface release has led some to describe the company as "struggling" in the tablet arena. I believe, however, that since many users (myself included) knew the Surface Pro would be released and would represent a significantly richer experience, they deferred their purchase until the Surface Pro's debut. If the upgraded model delivers even most of what it promises, it has the potential to be a game changer in mobile computing.

Buy early and oftenThe broad base success that Microsoft achieved in the most recent quarter, as illustrated by solid growth in most areas, is hugely positive for the stock. While the numbers are not the blockbusters you may be used to from Apple, they are solid and more in line with the Microsoft approach. Drawing upon this strength, and in anticipation of the Surface Pro release, the stock is an absolute buy for your portfolio.